Picture this: You are the category manager responsible for your organization’s contract security program and security cost reduction. Your current security contract is approaching the end of its three-year term, so you’re performing a review of the program and double-checking the annual spend before either negotiating a renewal with the current vendor or considering an RFP.

As you dig into the numbers, something doesn’t look right.

Although your contract clearly indicates the security vendor’s rates are to increase only 3% annually, your calculations show a 6% increase over the previous year’s security spend. Looking further, you realize the prior year’s spend had jumped 4.5% over the agreement’s first-year spend.

Somehow, despite the contract’s limitations, your company has been spending more on security than you’d anticipated three years ago and your security cost reduction program isn't working as well as you had hoped.

A quick comparison between your recent security invoices and the contract reveals that the vendor is invoicing using the contract’s current pricing table. You also double-check with your field office staff and confirm that your overall hours-per-week of security service have not increased.

So if the security contractor is using the rates stipulated in your contract, and your service levels have not changed, why are you spending more for your security service?

The answer may lie in something called “Position Rate Variances,” and while that might sound like a fancy financial term, its meaning is simple: your security vendor is using your approved bill rates in an unapproved manner.

In fact, it’s possible your security vendor isn’t deliberately doing this—and may be unaware it’s happening at all.

The source of most Position Rate Variance problems lies within the vendor’s payroll and billing system(s). Some security vendors have an integrated software system that combines payroll functions (paying wages to their personnel) and billing functions (invoicing clients for services rendered). Other vendors have separate payroll and billing systems that are supposed to “talk” to each other to ensure accurate payroll and billing. In either case, the systems are only as accurate as the data input and the management of the data to reflect what actually happened with every billable hour of service.

If no one is watching for them—which is often the case given the complexity of this indirect spend category—Position Rate Variances can quietly and insidiously increase your security spend. If the vendor’s system is using rates stipulated in the contract, a cursory review of your invoices may fail to uncover any glaring anomalies. A more in-depth review may be required to find out what’s really going on.

We’ll explore the two most likely ways a vendor’s system can result in billing errors—and increase your security spend to better manage your security cost reduction.

1) Billing Higher-Position Rates for Lower-level Fill-ins

In your contract, you probably have a defined hierarchy of security officer positions. For example:

• Officer Level 1: An entry-level designation for security personnel new to your account. These officers are performing basic tasks such as foot patrols of parking lots and checking perimeter gates after hours.
• Officer Level 2: A slightly advanced designation for more seasoned officers. These officers are expected to work at access control points such as lobbies, loading docks, etc., providing badging, screening, and concierge services.
• Officer Level 3: A designation reserved for personnel who have received training in your Security Operations Center (SOC). These officers monitor cameras, provide dispatch services, etc.

Each of these officer levels has a corresponding wage and bill rate delineated in the contract. Understandably, Level 2 officers make a bit more money than Level 1 officers and thus carry a higher corresponding bill rate. In turn, Level 3 officers earn more money than their Level 2 counterparts and their bill rates are also commensurately higher. The vendor has all the pay and bill data for each of these positions in their payroll and billing system—ostensibly to ensure the officers get paid correctly and the client gets billed correctly.

But what happens when a Level 1 officer goes on vacation for a week? The vendor moves personnel around to ensure the post is covered, temporarily reassigning a Level 2 officer to stand in for the vacationing Level 1 officer. That is a reasonable solution—after all, the Level 2 officer can certainly accomplish the tasks assigned to the Level 1 position. All the required security posts are covered for the week, everything runs smoothly, and there’s nothing left to worry about. Right?

Not so fast.

Because the vendor paid that Level 2 officer at his or her regular Level 2 pay rate, the vendor’s payroll, and billing system defaulted to the Level 2 bill rate.

That means you, the customer, were billed at the higher Level 2 officer’s bill rate for that Level 1 position—over the entire week. What the vendor should have done was manually correct the billing in their system to bill you only the Level 1 rate for the Level 2 fill-in.

Unfortunately, because the Level 2 bill rate is an established rate in your contract, it may not look like an error when you pay the invoice—but any cost reduction consultant would agree, you were absolutely overcharged.

2) Billing Supervisor Rates for Officer Positions

In addition to the three officer levels outlined above, your contract probably defines a Supervisor position. In this example, the Supervisor on your account schedules officer coverage oversees all posts, handles disciplinary issues, etc.

Sometimes, the Supervisor needs to stand in for her subordinate officers—if they’re running late, have to leave early for an appointment, etc. In those cases, the Supervisor may stand in for an officer for as little as 30 minutes or as long as an entire shift.

When this happens, the vendor should bill that position at the original officer’s post rate—not the higher Supervisor rate. Unfortunately, unless the vendor or a cost reduction consultant catches that Position Rate Variance and manually adjusts the billing in their system, you’ll likely get billed at the higher Supervisor rate.

Again, because the Supervisor rate is one of the established bill rates in your contract, it may not look like an anomaly on the invoice—but it’s incorrect and is another way you could be overcharged.

Lack of Vigilance Can Be Costly

On the vendor side of the equation, there are multiple points where inaccurate information or careless data entry can affect what gets billed to you. Supervisors are supposed to confirm hours worked, by position, for every hour of every shift in a billing period. Managers are supposed to validate site hours—and cross-check for potential errors. Payroll support staff are tasked with cross-checking timesheets and electronic check-in logs—and manually correcting any errors. Finally, Accounts Payable personnel are supposed to cross-check billed amounts against contractual obligations before submitting invoices to clients for payment. If any of these persons makes an error (or misses one), you could be billed incorrectly.

Because most security billing is based on what the vendor pays their personnel, the vendors already have a built-in method for flagging underpayment of wages to their own employees. An employee whose paycheck is lighter than usual will be quick to call his or her local field office to resolve the problem. However, those employees have no idea if their time was billed to a client at the correct bill rate. Not surprisingly, security vendors are more likely to catch scenarios where the client is underbilled rather than overbilled.

On the client-side, you may not be ideally set up to monitor Position Rate Variances. Many clients who use contracted security services do not have the internal bandwidth to cross-check every invoice from their security vendor to ensure each position, post, and shift was billed correctly.

Thus, a scenario emerges where the vendor’s inaccurate invoices are routinely processed and paid— and your good contract slowly morphs into a bad deal.

The Impact to Your Bottom Line

If you don’t have a security cost reduction mechanism in place to ensure you are paying the correct amount for every security position on your account, overbilling from Position Rate Variances are likely to go unchecked for months or even years. The overall effect on your security spend—and your bottom line—can be significant.